When a business finds itself unable to repay debts to creditors, insolvency can seem like the only option. However, before this happens you can try to renegotiate your debt. Known as a creditors scheme of arrangement, this will allow you to come to an agreement with your creditors and preserve your business. In this article, we’ll explain what a scheme of arrangement is and why it can be a good alternative to a Deed of Company Arrangement (DOCA).
What is a scheme of arrangement?
A scheme of arrangement is an agreement an indebted business makes with its creditors. This agreement needs to be approved by the creditors who are affected by it. It can cover things such as:
- The deadline for payment
- Interest you may owe to your creditors
- Giving creditors shares in your company as a form of repayment
The proposed scheme needs to also be approved by the Court.
Why is it important?
A scheme of arrangement binds a company and its creditors to the terms of the arrangement. This type of scheme gives a company the chance to pay off its debts without entering insolvency. However, this kind of exercise should not be undertaken without the prior advice of a lawyer.
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Companies who wish to propose a scheme of arrangement need to follow a particular process as outlined in the Corporations Act 2001 (Cth).
Application
The company must apply to the Court to convene a meeting of the creditors to vote on the arrangement.
Notice
ASIC needs to also be notified of the proposed arrangement. ASIC at this time will also have the opportunity to make submissions to the Court.
Meeting
The creditors vote on the scheme at a meeting. The scheme can only pass if 75% of the creditors present vote in favour.
Court Approval
The scheme goes back to the Court for approval. The Court can also at this time impose any conditions on the scheme.
Scheme takes effect
The scheme takes effect. The company and creditors need to comply with all terms involved.
What about a Deed of Company Arrangement (DODA)?
A deed of company arrangement (DOCA) is a binding agreement between the company and its creditors to allow the company to trade in order to pay back its debts. The DOCA will generally specify how the company’s affairs and assets are to be dealt with so that the business (or as much of it as possible) can be operational again. A DOCA differs from a scheme of arrangement as a scheme is only applicable to creditors who are affected by it. Further, a scheme will still apply to dissenting voters.
Finally
Companies that find themselves struggling to repay their creditors have options when it comes to restructuring their debts. One such way is by entering a scheme of arrangement. However, these schemes are often complex and require strict legal compliance. If you have further questions about a creditors scheme of arrangement, we recommend that you contact a business lawyer.
